Education Next is a journal of opinion and research about education policy.

Rhode Island’s Landmark Pension Reform

Last night, by overwhelming margins, the Rhode Island legislature passed what may be the nation’s most comprehensive state public employee pension reform ever (see our analysis for an education perspective on the bill). While pension battles have been front-page news in states such as Wisconsin, this reform didn’t emerge from an anti-union crusade. Instead, as Ted Nesi, the WPRI reporter whose in-depth coverage became must-read in the state, explains, it was a tale of leaders finally confronting a fiscal nightmare:

The bill, which Governor Chafee is expected to sign next week, will face court challenges. Its enactment is a bitter, life-changing event for retirees and workers who spent their lives expecting a retirement benefit they now won’t get in full. And taxpayers are only avoiding far higher pension costs in the future, not saving huge sums.

Make no mistake, though: the bill is an extraordinary – and unlikely – achievement for the three leaders most responsible for shepherding it through: Chafee, House Speaker Gordon Fox and, most of all, Treasurer Gina Raimondo….

The lion’s share of the credit for the pension overhaul will go – justly – to the treasurer. The political newcomer and former financier is already winning glowing national media coverage, making her the darling of anti-pension warriors from coast to coast.

What that misses, though, is the nuance of her approach to the issue. Raimondo didn’t push to scrap defined-benefit pensions because like many experts, she thinks defined-contribution accounts alone don’t provide “retirement security.” She shined a bright spotlight on the funding shortfall and used her considerable speaking skills to push it to the top of the state’s agenda. She won over Chafee, lawmakers, the business community and many members of the public with her ideas for solving the problem. And she came up with a complicated plan that just may do the job.

As Nesi notes, the bill has real and painful consequences, especially for retirees who could see their annual cost-of-living adjustments (COLA) frozen for up to 19 years. Still, the the Rhode Island plan is thoughtful, comprehensive, and mostly succeeds in sharing the burden. Current teachers take on more risk. Taxpayers, although they pay less annually, pay over an extended term. Retirees bear the greatest load of all: as the years pass without a COLA, those with small pensions will see their buying power decrease.

Other states continue to ignore these issues or have tried to address pension shortfalls through gimmicks or delays. Some, like Illinois, slashed the pensions of new teachers and will use the contributions of these teachers to subsidize current teachers and retirees — in effect robbing the future by making it more difficult to recruit new teachers. And others want to use shortfalls as an excuse to try to gut public employee benefits altogether.

Rhode Island’s political courage offers an important example, not only to pension problem-solvers in statehouses, but also to those in our nation’s capital trying to solve another massive financial dilemma.

Why should the retirees pay for the mismanagement of their retirement contributions? How much are the managers of the pension plan losing? It never ceases to amaze me how those people who have money are so eager to champion laws and reforms that take away from those who have so little to give. With prices going up everyday how are retirees suppose to survive when no increase in their income for 19 years. And did the treasurer take a cut in pay or her retirement benefits?

Earned benefits or not, the system that provides the benefits has to be malleable to the changes in the economic environment. The idea that past achievements should automatically entitle people to future rewards, is a faulty concept. Ultimately contracts that did not anticipate future developments need to be altered or reinterpreted in light of different circumstances, (The US constitution is a quintessential example of such), and like all truly “good” or “progressive” reforms, there are always going to be people who are negatively affected. A decision that makes “everyone happy” are almost always diversionary tactics, and are doomed to eventual failure. A job well done to Rhode Island, and keep going!